Talk America v. Michigan Bell Telephone Co. (10-313); Isiogu v. Michigan Bell Telephone Co., (10-329) (consolidated)

Oral argument: Mar. 30, 2011

Appealed from: United States Court of Appeals for the Sixth Circuit (Feb. 23, 2010)

INTERCONNECTION, ENTRANCE FACILITIES, FCC, TELECOMMUNICATIONS ACT OF 1996, AGENCY AMICUS BRIEFS

In 1996, Congress passed the Telecommunications Act to increase competition in the telecommunication and broadcast markets, and to remove unnecessary regulatory barriers to entry. The Act required local telephone monopolies to grant access to their local infrastructure in order to expand service choices and options in the telecommunications industry. To ensure that such competition was viable, Congress mandated that regulators may require former monopolies to provide access to their local networks at a regulated rate. At issue in this case is whether the incumbent telephone companies may be required to build and lease “entrance facilities” (the cables that connect two local networks) at regulated rates.

The Sixth Circuit Court of Appeals, rejecting an argument in a Federal Communications Commission amicus brief, determined that incumbent telephone companies cannot be required to provide access to entrance facilities at a regulated rate. Respondent AT&T, an incumbent telephone company, argues that competitors are allowed to build their own entrance facilities, and therefore that former monopolies do not have to provide access at the cost-based, regulated rate. By contrast, various competitors including Petitioner Talk America and Amicus Sprint Nextel maintain that, under the Act, AT&T is required to provide discounted access to its local infrastructure, and that such access necessarily includes entrance facilities. The Petitioners also assert that the Sixth Circuit improperly overruled the Federal Communications Commission’s interpretation of the Act.

The Supreme Court’s decision in this case will affect the complex regulatory relationship that has developed over the last fifteen years between former monopolies and newer competitors in the telecommunications industry. This decision may also have implications for the legal weight of administrative agencies’ amicus briefs in lower federal courts.

[Questions presented]
[Issues]
[Facts]
[Discussion]
[Analysis]

Questions presented

Talk America, Inc.

I. Whether the Sixth Circuit erred by determining that the Telecommunications Act and the Triennial Review Remand Order permit incumbent local telephone companies to charge competing telephone companies competitive rates, which is more than cost-based rates, for entrance facilities used for interconnection, thereby creating a conflict with the Seventh, Eighth, and Ninth Circuits.

II. Whether the Sixth Circuit erred by disregarding the Federal Communication Commission’s interpretation of its regulations, contrary to the deference standard established by this Court in Auer v. Robbins, thereby creating a conflict with the Ninth Circuit.

Isiogu

Was the Michigan Public Service Commission barred from requiring incumbent local exchange carriers ("ILECs") to offer their competitors telecommunications facilities, known as "entrance facilities," at cost-based rates under § 251(c)(2) of the Telecommunications Act of 1996 as a result of a Federal Communications Commission rule eliminating ILECs' obligation to provide similar facilities under § 251(c)(3) when they are used by competitors for a different statutory purpose?

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Issues

1. Whether “entrance facilities” used for “interconnection” between incumbent local exchange carriers and competitor local exchange carriers must be provided at cost-based rates to competitor local exchange carriers under the terms of 47 U.S.C. §251(c)(2).

2. Whether the Federal Communication Commission’s interpretation of its Triennial Review Remand Order, as put forward in its amicus brief to the Sixth Circuit Court of Appeals, is entitled to deference under Auer v. Robbins.

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Facts

In 1996, Congress passed the Telecommunications Act of 1996 (“the Act”), which was designed to foster competition among local telephone companies that use similar network technologies to provide a single type of service. The Act required that incumbent telephone companies provide access to their local telephone networks. Specifically, local telephone companies were required to enter into agreements with competitive local exchange carriers (“CLECs”) to provide access to their networks by allowing competitors to connect to the local telephone company’s network, specifically described as the incumbent local exchange carrier (“ILEC”) switch.

The CLECs’ and ILEC’s networks are linked together by a direct wire connection between the CLECs’ and the ILEC’s switch. To facilitate these connections, an entrance facility was created that allowed CLECs to access the local telephone network rather than directly connect to the exchange carrier switch. The advantage of this approach was that the competitor did not have to run a wire all the way to the local telephone company’s exchange carrier switch, and could instead connect to a much more convenient entrance facility.

As the telecommunications industry was being deregulated and legislation was enacted authorizing greater competition among local carriers, the Federal Communications Commission (“FCC”) initially ruled that entrance facilities were a part of the local infrastructure that had to be provided to competitors at a regulated rate. However, after court challenges, the FCC ruled that entrance facilities were distinct from a local exchange carrier switch, and that local telephone companies were allowed to sell access to the entrance facility at market rates.

After AT&T, which owns Michigan Bell Telephone Company, raised its entrance facility rates to competitive market rates, the CLECs filed a complaint with the Michigan Public Service Commission (“MPSC”), seeking access to local telephone wire lines. The MPSC ruled in favor of the CLECs and required that AT&T offer entrance facilities at regulated rates. AT&T appealed to the United States District Court for the Eastern District of Michigan, which concluded that AT&T was not required to offer regulated, below-market rates to competitors. The MPSC and other associated competitors subsequently appealed the District Court’s decision to the Sixth Circuit Court of Appeals.

The Sixth Circuit affirmed the judgment of the District Court that AT&T was free to price access to the more convenient entrance facility at market rates. Specifically, the Sixth Circuit determined that the entrance facility was distinct and separate from the exchange carrier switch. At the Sixth Circuit's invitation, the FCC submitted an amicus brief siding with the CLECs. However, the court dismissed the brief on the grounds that the FCC was not interpreting a legislative rulemaking, low-level staffers prepared it, and that agency amicus briefs interpreting their own regulations do not deserve deference except in the Supreme Court.

In contrast to the Sixth Circuit, the Seventh and Eighth Circuits have ruled for the CLECs in similar lawsuits, holding that entrance facilities are a key component for access to the local carrier exchange switch. The Seventhand Eighth Circuits have also required the ILEC to provide access to the entrance facilities at regulated rates, rather than at market rates.

The CLECs appealed the Sixth Circuit's decision to the Supreme Court, and the Court granted certiorari on December 10, 2010.

In a related case, AT&T sued the MPSC and Sprint Nextel, a competitor attempting to enter the local telephone market, after the MPSC ruled against AT&T in an arbitration hearing when negotiations with Sprint Nextel failed. The disagreement arose because the FCC merger requirements mandated that AT&T provide access to local telephone networks; however, AT&T refused to provide access at a regulated cost basis, and instead insisted on the market price. The court dismissed AT&T’s complaint with prejudice.

The Supreme Court consolidated the two AT&T cases relating to the exchange carrier rate requirements under the Act.

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Discussion

The crux of these cases turns on determining which telecommunications network provider is responsible for building entrance facilities to provide access to local telecommunications infrastructure. Respondent Michigan Bell Telephone Company, which does business under the name of AT&T and is owned by AT&T (“AT&T”), argues that so long as access to infrastructure is provided, the company is not required to lease access to its entrance facilities at discounted regulated rates. Alternatively, Amicus Curiae Sprint Nextel and Petitioner Talk America argue that AT&T is required to provide access to entrance facilities under the Telecommunications Act of 1996 (“the Act”), because the Federal Communications Commission (“FCC”) has determined that entrance facilities are a critical component of access to the local wired infrastructure.

Competition in Communication Services

Amicus Curiae Sprint Nextel argues that the ability of competitive local exchange carriers (“CLECs”) to compete in the communications arena will be severely weakened if the Supreme Court determines that entrance facilities are not required to be leased at regulated rates. Additionally, Sprint Nextel notes that AT&T and Verizon are the two major owners of local telephone networks, which they acquired from legacy infrastructure developed during the telecommunication monopolies; therefore, these two companies have a significant competitive advantage in connecting non-local customers to their local networks. Sprint Nextel states that connecting calls to access local wire lines is required to successfully compete in the communications industry. Sprint Nextel also argues that wireless companies will be at a competitive disadvantage if AT&T and Verizon are able to set their own rates, because interconnectivity costs are major expense for telecommunications providers.

The California Public Utilities Commission further notes that, under the Sixth Circuit’s analysis, the incumbent local exchange carrier (“ILEC”) has discretion to determine the interconnection facility, and thereby to limit its competitors’ ability to connect to local networks, leading to less competition in the telecommunications sector.

Competition in Communication Facilities

Respondent AT&T argues that Congress intended to deregulate the telecommunication sector, including telecommunications infrastructure, and to encourage communication facilities competition. AT&T also notes that many companies in the communications arena have successfully invested in communication infrastructure, and have engaged in effective competition, without relying on regulated leasing agreements.

AT&T further argues that, with the passage of the Act, Congress included temporary extraordinary measures to jump-start competition in the communications arena. AT&T contends that these measures were only intended for “bottleneck points” in delivering communication services and that entrance facilities are not a “bottleneck point.” AT&T states that “bottleneck” is not descriptive of entrance facilities, because entrance facilities and access to local networks are easy for companies to effectuate themselves, or to acquire from alternate wholesale providers. AT&T also notes that there is a viable market for competitive entrance providers for communication companies that do not wish to build their own access infrastructure.

AT&T states that providing access to local networks at cost harms the economy by discouraging further investment in infrastructure and technology. Additionally, AT&T argues that, by maintaining a regulated access price, CLECs are discouraged from innovating or building their own infrastructure, since they are able to acquire access at or below the price it costs to build such infrastructure.

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Analysis

This case asks the Supreme Court to decide who has to pay for and maintain a high capacity wire between telephone networks, known as an “entrance facility.” Congress passed the Telecommunications Act of 1996 (“the Act”) to foster competition between the old telephone monopolies, incumbent local exchange carriers (“ILECs”), and their new competitors, competitive local exchange carriers (“CLECs”). The Petitioners in the case are Talk America, which is a CLEC, and the Commissioners of the Michigan Public Service Commission, including Orjiakor Isiogu (collectively “Isiogu”).The Petitioners and the Federal Communications Commission (“FCC”) maintain that, under the Act, ILECs must provide entrance facilities to CLECs at cost-based rates. The United States Court of Appeals for the Sixth Circuit ruled, and Respondent Michigan Bell Telephone (“AT&T”) argues, that ILECs need merely allow CLECs to make their own connections to the ILECs’ networks. Alternatively, Petitioners Isiogu and Talk America argue that the Sixth Circuit improperly overruled the FCC’s interpretation of the regulation at issue, the Triennial Review Remand Order (“TRRO”).

Entrance Facilities: Interconnection vs. Backhaul

Under the pre-TRRO scheme, the FCC required ILECs to lease entrance facilities to CLECs at cost-based prices under 47 U.S.C. § 251(c)(3). The parties do not dispute that the TRRO removed entrance facilities from the Section 251(c)(3) requirement. This case arises because in TRRO ¶ 140, the FCC noted that, under Section 251(c)(2), CLECs would still be able to request “interconnection facilities . . . at cost-based rates to the extent that they require them to interconnect with the [ILEC’s] network.” “Interconnection” is not defined by the Act.

Isiogu explains that there are two separate functions for entrance facilities: carrying traffic between the customers of two separate carriers’ networks and carrying traffic among a single carrier’s customers. This is possible because there are often multiple points of interconnection. The first is classic interconnection, the second is called “backhauling.” Significantly, backhauling is the use of an entrance facility targeted by the FCC for removal from Section 251(c)(3) with the TRRO. AT&T points out that the FCC only mentioned backhauling in two footnotes in the TRRO, and argues that the distinction was irrelevant to the FCC’s decision. Nevertheless, Isiogu argues that an entrance facility can be an interconnection to the extent that it carries traffic from the customers of one carrier to those of another. The Sixth Circuit suggested that CLECs build their own networks between their customers and then interconnect separately to access the ILEC’s customers. However, Isiogu argues that not only can these two uses be billed separately, but that requiring CLECs to duplicate an ILEC’s network would create precisely the anticompetitive marketplace that the Act was intended to prevent.

Petitioners Isiogu and Talk America argue for a broad definition of “interconnection,” based on FCC regulations, that includes any “technically feasible” means of connecting two carriers’ customers. Isiogu asserts that entrance facilities serve as interconnections because they carry traffic between carriers. In addition, Talk America argues that TRRO ¶ 140 explicitly incorporates entrance facilities within the definition of interconnection for the purposes of Section 251(c)(2). Isiogu reads Section 251(c)(2) to mean that interconnection takes place “within the [competitive] carrier’s network.”

Respondent AT&T argues that entrance facilities and interconnections are categorically different, and therefore that Section 251(c)(2) does not require ILECs to provide entrance facilities to CLECs. First, AT&T argues that the language of Section 251(c)(2) makes two distinctions: first, interconnections are to be made at a point “within the [incumbent] carrier’s network,” and second, ILECs are required to open their networks to the CLEC’s “equipment and facilities.” In addition, AT&T points out that the FCC defined entrance facilities as being outside a carrier’s network. Therefore, AT&T concludes that the interconnection required by Section 251(c)(2) is merely the point at which a CLEC connects its wire to an ILECs’ network.

Is Auer deference warranted?

Isiogu,Talk America, and the FCC urge the Supreme Court to overrule the Sixth Circuit for failing to give proper deference to the FCC’s amicus brief under the standards prescribed in Auer v. Robbins, 519 U.S. 452 (1997). First, they argue that the TRRO was properly promulgated by notice and comment rulemaking, and therefore entitled to deference under the Chevron doctrine. Second, they assert that TRRO ¶ 140 is not an “interpretive rule,” as the Sixth Circuit held, but rather a key part of the order which the FCC was required to reconsider by a court order. Finally, Isiogu and Talk America point out that the FCC’s amicus brief was an interpretation of its own ambiguous regulation. Therefore, they argue, the FCC’s amicus brief was entitled to substantial deference and should not be overruled unless the interpretation was “plainly erroneous or inconsistent with the statute.” At the very least, Isiogu argues, the FCC’s brief should have received a “general level of deference,” out of respect for the agency’s expertise in a highly technical arena.

AT&T argues that neither TRRO ¶ 140 nor the FCC’s amicus brief is an authoritative interpretation of Section 251(c)(2), and therefore neither is entitled to deference. AT&T points out that neither of the FCC’s notices of proposed rulemaking regarding the TRRO cited Section 251(c)(2), or otherwise indicated that Section 251(c)(2) would be affected. AT&T also argues that this interpretation of Section 251(c)(2) amounts to the creation of a new obligation on ILECs without notice. Specifically, AT&T points to the FCC’s summaries of the TRRO rulemakings, which explicitly stated that Section 251(c)(3) no longer obligated ILECs to lease entrance facilities at cost-based rates, but omitted any reference to the language of TRRO ¶ 140. Therefore, AT&T contends, there was no authoritative but ambiguous interpretation of Section 251(c)(2) for the FCC’s amicus brief to interpret, and thus the brief was not entitled to Auer deference.

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Conclusion

The Supreme Court will determine where responsibility for building entrance facilities lies: either with the incumbent telephone companies ("ILECs") or with competitors seeking to enter the local market ("CLECs"). AT&T argues that ILECs' duties under the Telecommunications Act of 1996 are solely to provide access to their customers’ telephone lines, and that ILECs are not required to lease access to entrance facilities at a regulated rate as long as competitors can build their own entrance facilities. On the other hand, Sprint Nextel and Talk America argue that meaningful competition still requires access to entrance facilities at a regulated, cost-based rate. This case will determine the nature of the relationship between ILECs and CLECs nearly fifteen years after Congress enacted the Telecommunications Act of 1996 to end monopolies and foster competition. This case also has broader implications for how lower federal courts will implement the holding of Auer v. Robbins.

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